America has been failed by its government and the nation now faces catastrophic consequences unless that government changes its ways, Wharton management professor Lawrence G. Hrebiniak concludes in his new book, The Mismanagement of America, Inc. Among the biggest problems he sees: A looming explosion of government entitlement payments for Medicare and Social Security that could bankrupt the nation as its Baby Boom generation heads into retirement, and an uncoordinated band of intelligence agencies that are no better equipped to avoid another September 11 disaster than they were before those terrorist attacks. Hrebiniak spoke to Knowledge@Wharton about what the nation must do to avoid economic meltdown.
Knowledge@Wharton: You frame America as “a failing corporation.” Why did you use that analogy?
Hrebiniak: That’s a good question to start with. I had done a lot of work over the years with corporations. I worked with a lot of global organizations and of course I was familiar with the corporate model. I began looking at the United States and I thought to myself “This is like America, Inc. Look at it, it’s huge. It’s over $3.5 trillion a year. It’s a big business.” America is diversified: It’s in defense, education, media, energy, banking and finance, engineering, science, transportation, you name it.
America is a diversified large organization globally. It acts like a business. It hires people, fires people, has health care plans, and has retirement programs. So, I started looking at it that way and said “If I look at this organization, as a large global player, trying to be efficient and effective, run by top management and I’m only focusing on top management — the White House and Congress; let’s see what we can say. Let’s compare this organization to a large corporation to see how it is being managed.”
As you know, most of my work in the past has been in management, strategic management. So, this to me was an interesting sort of challenge — to relate what I know about business to America Incorporated.
Knowledge@Wharton: In that analogy, you come to the conclusion that the management we have isn’t really doing the job for its shareholders or other stakeholders.
Hrebiniak: This is exactly right, the shareholders, the citizens, tax payers and so on. Overall, the top management team is not performing. They are performing better for some more than others. As we know, there are all sorts of data about income discrepancies and equities and so on. But, overall, no — they are not performing very well at all.
Knowledge@Wharton: You describe in your book the consequences that await us if the government doesn’t change its ways, and you describe those in a couple of different forms. One of those is in fiscal matters. You warned that we are facing a coming explosion of entitlement spending on things such as Social Security and Medicare, as baby boomers prepare to retire. Can you describe that scenario and what kind of dramatic changes need to occur in order to avert that?
Hrebiniak: If you take a look at our country, take a look at our debt, for example, we’re at $9.5 trillion. It’s a lot of money. The debt is growing at $2 billion a day, over $200,000 a second; the debt is growing in the United States — an amazing amount — that’s bad enough. But, the Treasury itself has looked ahead and talked about what I call “a fiscal gap.” They’ve looked ahead a decade or two, or three and said that given the entitlements that are coming up, given the baby boomers growth coming into the market, so to speak, what is the fiscal gap? You know, they projected it at $63 trillion. So, if we have a $10 trillion debt already, with a $63 trillion fiscal gap, what are we going to do about this?
We are not confronting the issue. Politicians on both sides of the aisle have ignored it. It’s been going on for a long time. What do they do? In the book I say for example “They fiddle with deficits; they fiddle while the U.S. burns, so to speak.” Look at Social Security; Social Security has been turning a profit. And so, what do we do with the profits from Social Security? We take the profits, we use it for existing budgets, existing deficit reduction, for example, a la Clinton and some of the others.
But, what do we do? We then take IOUs and put them in the Social Security Trust Fund and we call those IOUs assets. So, we are putting debts into the trust fund, calling them assets and saying “We’ve got all of these assets in Social Security.” No we don’t; we’ve got debt that some day is going to come and bite us on the leg. We’re going to have to pay for these things.
If you add in Medicare and Medicaid, take a look at all of the things that we have and what are our top managers doing? Nothing, they have their head in the sand. They’re not motivated to make changes and why? You know, some of it is obvious. For example, Social Security; our top people don’t worry about Social Security because they’re not on Social Security; the way that they don’t worry about Health Care. I think that people in Congress pay $35 a month for unlimited health care.
They don’t understand the problems of many Americans when it comes to health care. To them, they’ve got everything and they are ignoring the problem. Now, if we don’t take care of some of these things coming up soon, if we don’t bite the bullet soon, if we don’t worry about things like balanced budgets, constitutional amendments to curb spending, if we don’t do these things, we’re going to find ourselves in a relatively short period of time, with a major, major problem, that is not going to be reversed very easily.
Knowledge@Wharton: Other people have talked about this before. In fact, David Walker, the comptroller of the currency has been travelling all over the country raising alarms about the coming fiscal problems that we are facing. Do you think that it is possible, in some way to get the government to recognize these problems that you’re talking about?
Hrebiniak: I think that we have to force them. I don’t know how, but I guess what I’m saying is that I’m hoping, maybe against hope. But I hope that some of the politicians, especially this supposed new breed of politicians will make some changes. I mentioned a balanced budget amendment, in a constitutional amendment. We tried it with Gramm-Rudman way back. There was some other one, I forgot the name of it, it was kind of a fiscal control.
None of this has worked because we get around things. They get around things with earmarks. They get around things with spending. I mean, they attach earmarks in Congress to everything. We are running 16,000 earmarks a year now, attached to good bills. These things are expensive, they are not going anywhere. So, what do we do right here? A constitutional amendment forcing a balanced budget – I would eliminate all of the earmarks. If something can’t pass on its own merits, as a bill, it should not be attached to another bill.
I remember, years ago Ronald Reagan vetoed a bill because it had a few hundred earmarks attached to it. It was a transportation bill. One of the latest versions of the transportation bill, I think in 2006, had over 6,000 earmarks attached to the bill. Go one step further. I know maybe I’m going too far off field, but I just read something by our governor Ed Rendell, in Pennsylvania, about how our bridges need work. And we all know what happened in Minnesota with the bridge collapse and so on.
Here’s another example, since 1970 when we passed The Highway Transportation Act, we have had over $700 billion supposedly, dedicated for roads and bridges. I think that something like 85% of those monies never reached bridges and roads. They went into Senators and Representatives earmarks, private home based projects. All of this is wasteful. We just have to stop it. No earmarks, a balanced budget, a constitutional amendment; maybe change the tax code. I know that I’m getting the feel of it. Our tax code is a mess.
Bush came in and said that he was going to reduce the tax code, reduce the complexity. In his first term, he increased the tax code by over 10,000 pages. Now, again, he is not alone. Other presidents have done the same thing. Why do we do that? The greater the complexity, the greater the number of loopholes, the more we can hide stuff. And so, we just have to say “Let’s revise the tax code. Make it simpler. Let’s get away from all of these things that we are hiding.”
So, I’d like to think that we have politicians who are going to wake up, who are going to be not so short term oriented and become more like managers thinking strategically. The long term is that we can’t create this debt and we can’t leave it. By the way, this debt of course, not only increases the cost of government; it crowds out private investment. And so, I’m worried about innovation and private investment in the country because more and more money is being taken up with the debt and with things like military spending. It’s burdening future generations.
We just finished, I think last year, paying off the last 30 year bonds or bills for Vietnam. And, you know, here we go… We’re starting now with of course Iraq and Afghanistan. We’re just picking up where we left off. So, I think that we’re creating real problems; trade and balances, I mean name it; we’ve got all of this debt. I mentioned the military. I am not against the military. But, when I look at the numbers as part of all of this, I get scared.
The military budget is huge. The online budget is huge and then we have all of this offline black box stuff, where we add more things to the budget. We just keep adding to the military. I know that we have to have a strong military. But, if I look at the military, plus the interest on the national debt; just those two things, the military budget and the interest on the national debt; I think of all of the tax dollars that we are receiving, I think 40 cents of it goes for those two purposes.
We have 60 cents left after the military and interest on the national debt. No wonder we are losing out. We can’t afford Amtrak, we can’t fix our roads, we can’t do so many things. We can’t support education, because we are spending too much.
And, of course, not only do we have a military industrial complex, but a friend of mine, just emailed me and said “We also have a military golf complex, because the military runs 300 golf courses worldwide.” And, you know that’s a big expense. I don’t know where that fits into the defense scheme of things, but we have to have those 200-300 golf courses.
Knowledge@Wharton: You want to have those generals in a relaxed frame of mind at all times.
Hrebiniak: Well, that’s the other thing. If the specialists and E2s, E3s, E4s and E5s, the enlisted military were using those golf courses, maybe I’d feel a little bit better. But, I have a feeling that is not the case.
Knowledge@Wharton: Probably not.
Hrebiniak: If they’re on the golf course, it’s probably as caddies for the generals.
Knowledge@Wharton: A lot of that debt is held by Sovereign Wealth Funds and other foreign interests. Are you concerned about that?
Hrebiniak: Well, I think that we should be concerned about it. For example, we have a lot of countries like China holding a lot of our debt. Now, probably nothing bad will come from it, but there is always the possibility. For example, we are now head to head with China in oil consumption. I mean they are growing and they are using more and more oil and, if the supply stays roughly the same in the world, or even less over the years…
In fact there is going to be a face to face, head to head confrontation with China about who gets the resources. And, they’ll be fighting with us to see who can waste the most, I guess because right now we’re the biggest waster of resources. Well, just look at that, if they’re holding a good chunk of our debt, dollar denominated debt, and we’re fighting with them, and if things happen in the world…
We’re seeing now, the Euro for example becoming stronger. I know that Europe recently has been having some troubles. But, we know that the Euro has grown amazingly. So, what if a lot of the countries start investing in Euro denominated debt? The dollar will go down. If the dollar goes down, a lot of these people holding dollar denominated debt might want to get rid of some of that debt. If they flood the market, what will happen? Our dollar is going to get hurt. It’s going down the tubes.
Our interest rates are going to suffer and we’re going to have to raise interest rates, in order to be attractive in the marketplace worldwide, which means that inflation will probably go up and a lot of people will not be able to buy homes, a lot of people will default on their credit card debt. And, will China do something political like that? I hope not. But, in the history of the world, it’s happened. Economic political things overshadow even common sense occasionally. So, yes I do worry. I would like to see us a little more solvent in the world — let’s put it that way.
Knowledge@Wharton: A return to the misery index, only much worse than we’ve had before perhaps.
Hrebiniak: I would think so and I’m very concerned about that.
Knowledge@Wharton: You’ve also raised concerns about the government activity in the area of security. Now, terrorism is on the minds of many Americans and the government makes sure that it stays there. But, you seem to think that the war on terror is not going very well.
Hrebiniak: Well, I have a concern here. Originally, when I was looking at material for the book, didn’t know much about the Intelligence community. I picked up a couple of things; I’ve talked to some people. I did some work for the Intelligence community years ago but on strategy, organizational design, that sort of thing and so I had some interest. Well, I started digging into things and I started looking at the management and organizational design of the Intelligence community to see if this could work; to see if I could explain from a management point of view, why we might be having troubles.
And, I came up with some notion. We’re spending a lot of money. I think it is $100 million a day on Intelligence. Now, we like to talk about our big Intelligence, the CIA, FBI and NSA. But, I started looking at this, I started digging and without a lot of trouble I found 64 different organizations involved in Intelligence, 64.
Knowledge@Wharton: Every branch of service has its own.
Hrebiniak: Every branch of service has its own. There are all sorts of things. I mean, in the book I list them; there are so many of them, I can’t even remember half of them. But, we have so many of them. And, what do we find? Not only do we have too many agencies, but we have divisive politics. We don’t have cooperation. We have competition across these agencies for money.
These agencies don’t share knowledge. Here’s a quote that came from a book of someone who studied the CIA, he said something like, the quote read “We don’t come to work asking: What information can we share with our colleagues, to solve problems? We ask what information can we hoard and keep away from others, so that we can pursue our own goals.” The translation is: we can keep our budget high; we become the important agency and so on and so forth.
So, we don’t have 15 or 16 agencies, we have 64; unclear responsibility, no knowledge sharing. And, just look, we created a czar; what was it 2004 when we created this act which said that we needed someone to coordinate. We put a czar in charge of things, but what did that mean? If I look at these 64 organizations, there are no solid lines; all of the lines are dotted. From a management point of view, what does that mean? We have a czar who has no power. He can appeal to people, he can talk to people at the CIA and say “Please do this” and they can say “Oh yes, we’ll think about it” — and then go and do what they want.
Knowledge@Wharton: You’re speaking of the director of Homeland Security?
Hrebiniak: Yes, exactly. It’s a powerless position. So, when I look at all of these organizations pursuing their own goals, not sharing information; when I look at poor integration or coordination across these agencies; when I look at any organization that would be this complex, with each agency doing its own thing. When I looked at it, I said that the Intelligence community… this is an organization where people work alone together. They don’t like sharing. So, what consequences might that have?
Well, we know what happened before 9/11, we didn’t know what was going on, after 9/11… If we’re not going to cooperate, if we’re going to have this complexity and we’re not managing it well — are we missing out on things that are going on out there? Are we not coordinating knowledge sufficiently? I’d like to think that we are, but I at least want to raise a red flag.
I suggested in the book for example, that reorganization might be needed. Why not have… and again this is following a kind of corporate logic, [if we have a corporation...] why not break into three groups: Foreign Intelligence, Domestic Intelligence and Military Intelligence.
Subsume all of the military under one, with authority. Have the domestic intelligence led by the FBI; have the foreign led by the CIA; and then start looking at these groups of people with different agencies inside, collapsing agencies under the three. And, then worry about things like lateral coordination, sharing knowledge, devising ways to share information laterally — to coordinate across these agencies. I would feel safer if we did that.
Knowledge@Wharton: You say several times in the book that these problems are so serious that we can no longer just shrug our shoulders as citizens and say “Well, that just the way that politics are. There’s really not much we can do about it because of the influence of lobbyists and that it is just the nature of the political system.” But, what can citizens do to affect the kinds of changes that you are talking about here, assuming those are the kinds of changes that they want?
Hrebiniak: That’s a hard question. It’s an important question, but it’s a difficult one. This is why sometimes, to be very frank, I am very pessimistic. Citizens, love their reality shows, they love doing their thing, and they don’t want to get involved. Now lately, how do I say this nicely, they’ve been getting involved, why? This is because the price of gas has gone through the roof; before when supply was plentiful and gas was cheap no one complained.
If we look at lobbyist activity and our government mismanagement for example, in 1973 the Middle East cut off all of the oil. People screamed and shouted and then all of a sudden, the supply came back. And, every politician has said since “We’re going to reduce oil dependency” since 1973. Every president elect, every vice-president elect, everyone running for Congress says the same thing. What’s changed? Nothing.
So, finally people are asking, [I think], “We’ve known about this for decades and nothing has been done. What’s going to be done now?” And so, I hear at least consumers screaming. They are actually and I read two days ago in the Wall Street Journal they are writing letters to their Congress people and they are saying “We have to get out of this mess.”
People that are getting hurt by the mortgage crisis — they are writing their Congress people. All that I can think about is, if there is a ‘Silver Lining’, maybe that’s the wrong word, but from all of the turmoil of late, it’s that we are getting people involved, that they are contacting Washington. If Washington, and especially with an election coming up, if we get some people in who, for example, [go back] eliminate earmarks, who demand balanced budgets, who reduce the power of lobbyists — with a real ethics bill — not like the one in 2007 which doesn’t control lobbyists at all.
If we scream for these things and eliminate the power of the lobbyists and wrote to our Congress people — and demand leadership finally, I’d like to think that we might be able to make a change. We’ve seen it happen before in our history. We’ve seen it happen in other countries.
Who was it…? I think it was Bob Herbert of the New York Times who said two years ago, he said “The problem is the U.S. is a nation of nitwits.” Now, there are times when I believe that is true, quite frankly, including me. But, I think that we are waking up. I hope that we are not going to remain a nation of nitwits. I hope that we are going to call our politicians. I hope that we are going to exercise the right to vote in this election coming up; not only for our president but for our congress people.
Now, having said that I still worry about other things. For example the Gerrymandering laws, the lobbyists. You know if you look at this from a management point of view, lobbyists are big business. There are 35,000 registered lobbyists right now in K Street — I call this in the book “The paved street of gold.” That’s something like 65 lobbyists for every member of congress. And, they’re holding money up, they’re playing games and our congress people are succumbing to that money.
But it’s more than that. There’s something that we have to stop also and that’s what I call in the book “The revolving door.” Half of the people who leave public life and take jobs in the private sector, become lobbyists. So, stop and think about a system of governance or a system of management that says: “On one side of the aisle, we have a lobbyist waving money; on the other side of the aisle, a congressman who wants that money, whose vanity is being fanned by that money, [wow, I'm important].” But he also looks across that aisle and says “You know if I play my cards right, I might land that $300,000 to $400,000 job in a few years as a lobbyist!”
Well, what we should do then is [change] that … ethic, the law has to change, the code has to change. We’ve got to reduce the power of the lobbyists and take away their power. We might, for example, refocus more on public funding of general elections. I know that we’ve been talking a little bit about that — but it’s not happening. You know, Obama backed out of it and other people are saying that we should do it. But, we have to get the power away from the lobbyists, from the big ones; we have to have the ethics bill.
And in fact, well, gerrymandering. I read someone, in 2004, the last big election that of 435 seats that were up in the House of Representatives, I think 35 were contested. The rest because of gerrymandering weren’t in any contest. So, imagine people looking at that and thinking “Why vote – if the election is a shoe-in?” So we have to make some other changes I admit. But I think with some of these changes, they have to be done incrementally, one at a time, focus on fiscal, focus on the gas problem, and focus on a host of things and then maybe people will bounce back.
Knowledge@Wharton: If a citizen is concerned about the issues that you have raised here; about the state of Homeland Security, about the looming problem with entitlements; how should they be preparing themselves for the coming election? We’ve often said that we need to get more voter participation and turnout, but don’t we have to have better informed voters? And, what are the responsibilities of a citizen who is preparing to vote, especially in light of the upcoming November elections?
Hrebiniak: We can answer the question by going way back to Cicero and then Jefferson. I mean basically what did they say? Cicero said that if citizens don’t remain abreast of the issues, what will happen is a management oligarchy will form and control the country and they will have no power. So, Cicero first warned us against the danger of being lackadaisical. Jefferson said the same thing and all of the founders. The citizens have a responsibility.
I’ve always felt that people get the leadership they deserve. And, if they want better than what they have now, if they want to avoid some of the problems that we are facing, what should they do? Their homework. Read up on the issues, challenge the candidates on the issues. I know that that sounds almost trite to say it, but they have to get involved. They have to think about what the issues are. They just can’t sit back and let themselves be fooled by the normal TV quick blurb, sound bite.
Let’s ask hard questions, let’s look into the candidates positions on certain issues and there are a lot of things to look into right now. Iraq, the military, Afghanistan, terrorism, fiscal irresponsibility — there are a lot of things that they should be screaming about to their congress people. I hope that I’m not sounding too trite and I hope that it’s not falling on deaf ears. But, I would like to see our citizens do more homework, get involved, pursue the tough questions and go with a clear head to these elections coming up in November.
Knowledge@Wharton: Is the media doing its job?
Hrebiniak: No, I don’t think so. I’ll probably get in trouble for saying this but, I don’t think so. I think that I see a lot of things in the media that are alarming; number one, increased concentration. You have fewer and fewer and fewer large organizations controlling a lot of the news. People align themselves, for example, it’s Fox that the Republicans watch and CNN that the Democrats watch.
And, we have all of these blogs. Someone once said to me “With all of these internet blogs and whatever, we have all of this news that people are well informed.” And, I said “No, not really, because the blogs that people are attracted to are those that you know — it’s like preaching to the choir.” They go to the blog that gives them the point of view that they want. And, the blogs don’t talk to each other. The people don’t talk to each other. It’s very narrow.
I’m also very sad and you are an ex-newspaper man and I can say this, and you would understand. Too many of our newspapers are disappearing. People don’t read. One beauty about newspapers is that they normally present, normally and especially your better newspapers present both sides of a story. They’ll have an editorial saying one thing and they’ll take an Op-ed piece on the other side.
There’s a lot of stuff that people can read on both sides and then say “You know, I like A and I like B, and let’s put them together now. This makes for an intelligent consumer of information. We don’t have that. Right now, our newspapers are disappearing. The blogs are increasing. Media is becoming increasingly consolidated and I’m concerned about that.
What is the old saying that “Big brother is watching you.” And, now I think it is getting to be more. I’m getting nervous, you are watching big brother. You are reading big brother; you are listening to big brother. You know, big brother is just not watching. I’m afraid that big brother is beginning to control a little bit too much. And, I don’t think consumers are doing enough to get all sides of a story.
Knowledge@Wharton: Do you have a sense that the time is right for this kind of message? Perhaps you see some sort of opportunity.
Hrebiniak: I think so, I hope so. You know, as I started to say before, I called it a ‘silver lining’ maybe that’s too strong, but given all of the problems that we are having, given the price of gasoline and given the mortgage crisis, given the fact that people are getting hurt — maybe this is what we need for a kind of social revolution of sorts; that people are going to scream and shout, that they’re going to vote their conscious; that they are going to come along and demand changes from their government.
Now, we have to be careful here. Take gasoline, you know, right now people are talking, politicians are talking gas holidays and additional drilling. First of all, I have some problem with the drilling. If we drill, for example in the Arctic National Refuge, in 10 years we will increase our use of gasoline, from our own sources by 3%. That’s hardly enough to make a difference, number one. But, number two, if we get enough of this increased supply, by lowering the gas tax or whatever, or by doing other things, we’re just going to increase demand. We are not controlling demand.
So, I would like to see us now turn to people and say “This hurts; gas prices are high. But, look what’s happening from gas prices being high. People are now buying more efficient cars. The demand side is changing.” People are responding the way that they should respond. Maybe what we should do is raise the gasoline tax and allow on income tax for truckers and others to have deductions because that’s their job.
But, maybe there is a way to control consumption and get people to think more in terms of efficient use of gasoline and resources. And, that would further force our politicians to take some action. Maybe I’m too ‘Pie in the Sky’ but I’d like to think that people are going to wake up and see the problems here and want us to do something about them.
Knowledge@Wharton: Well thanks so much for joining us today.
Hrebiniak: It was my pleasure. Thank you for giving me a forum to talk about my new book, I appreciate it.